11/3/2011 - The current market sentiment

The risk appetite has been hurt strongly by Moody's downgrading of Spain's debt to Aa2 triggering further worries about the debt risks evaluation in the Euro area while the markets are preparing for a tightening cycle to be entered by the ECB for containing the prices which should increase the cost of borrowing and covering the bonds auctions in Europe lowering the bonds and stocks prices after they have been underpinned by the adopted easing stance of the ECB after the credit crisis until now.
The US equities markets have been hit too after the drop of market confidence which followed the new downgrading of Spain underpinning the risk aversion sentiment supporting the greenback versus the single currency which came under pressure with its back securities leading Dow to have a red opening exacerbated by the rising of US trade deficit to 46.3b$ while the market was waiting for just 41b$ because of the rising of oil prices and also the rising of US initial jobless claim to 397k from 371 a weak earlier adding more worries about the stability of the labor markets to lead Dow to close below 12000 at 11984 on this new added risk from brought back from Europe threating the market confidence in the business spending to the current risks because of the rising of commodities and energy prices and the tension in Libya.
The sterling came under pressure after the MPC decision of keeping the interest rate unchanged at .5% and the buying bonds plan at 200bln Stg as the recent meeting minutes have shown that there was growing of the voting for tightening after as Mr. Dale has given his vote to hike the interest rate by .25% like Mr. Martin Weale and Andrew sentence has called for hiking by .5% while Possen was the only vote for increasing the buying bonds plan by another 50b Stg while the other 5 MPC voting members including BOE president Mr. Mervin King preferred leaving the interest rate unchanged keeping BOE 200b Stg buying bonds plan unchanged and this mixed position is looking holding until now as taking any direction will cause emerging of the other direction risks while the sterling rises when it finds signs of inflation and quickly gets back under pressure with the signs of economic weakness and both directions signs are existing containing the sterling movements
As we have seen recently with the down revision of UK Q4 GDP quarterly from -.5% to -.6% and the rise of UK Feb CPI to 4$ yearly and also the release of February Confederation of British industry survey of the retails sales which was the best figuring out of the stagflation case facing the BOE as it has fallen to 6 from 37 in January to ensure the market worries about the growing pace of the demand which is moving the growth up and in the same time the figure of the selling prices inside the retail sales sector has shown strong rising from 43 in January to 73 in February which shows the need of tightening too.
After the pressure had eased back on the single currency with the release of Feb Germane industrial productions which rose by 1.8% following a sudden falling in January by .6%, The pressure accumulated again forcing the single currency to break its support which held in the beginning at 1.386 brining back the single currency above 1.39 with new downgrading by Moody's of Spain sovereign debt one notch to Aa2 after it has begun the week with downgrading of the Greek sovereign debt 3 notches to B1. the breaking of 1.386 this time has triggered stop loses orders to bring down the single currency below 1.38 unable to get back above 1.386 until now with worries about the consequences of entering tightening cycle by the ECB on the struggling European debt ailing countries such as Greece, Ireland, Portugal an Spain containing the current market sentiment as the waited tightening actions for containing the prices over the medium term by the ECB will drive the costs of borrowing higher inside these European countries ailing of debt as hiking the interest rate will exceed the cost of covering their bonds auctions and in the same time adopting a tightening policy can feed the market with the believing that the ECB is caring much more now about the prices upside risks than funding the debt of the debt ailing countries which can lead to further injection of funds into the markets and banking system which can tackle the ECB efforts for containing the inflation over the medium term after it had resided above its 2% yearly target in the recent period fueled by remarkable increasing of the commodities and energy prices with the tension in the Middle East and specially Libya which is one of the most important and nearest oil and gas suppliers to Europe and specially Italy which takes 35% of its needs of gas from it also other countries behind of it like Spain, France and Germany and cutting its supplies should raise the cost of energy in Europe which can tackle the growth which has started to show good signs of recovery recently lead by Germany which has had significant declining of its unemployment rate of February to 7.3% from 8.5% in January and new 52k added jobs in that same month from just 18k in January while the market was waiting for another 18k in February and that's beside the continued spectacular improving of the Germane IFO business sentiment index which reached new high again in Feb at 111.2 and this number has not been seen since the beginning of that index in 1969 and also we have seen recently improving of its PMI manufacturing index to in February 62.7 from 60.5 in January a little bit above the market forecasting of 62.6 helping EU PMI to keep its scale of expansion of January at 59 and it is widely known that the number above 50 means expansion and below it means contraction.
God Willing, it is important to wait for important consuming data out from US as the release of US retails sales of February which are expected to be up by 1% from .3% in January while the core figure excluding the auto sales is expected to be up .6% from .3% in January too and we wait also for the preliminary figure of UN. Michigan consumers' sentiment of March to be down to 76.5 from 77.5 in February
Kind Regards
FX Market Strategist
Walid Salah El Din
E-Mail: mail@fx-recommends.comhttp://www.fx-recommends.com